FTSE 100 inches up as Sunak rolls out extra job support

Summary

• UK businesses and workers continue to seek support with higher level of restrictions in place
• Sunak reiterated that such an aid will eventually need to be withdrawn

Rishi Sunak, Chancellor, UK Treasury had granted additional support under the earlier announced Jobs Support Scheme (JSS) which begins on 1 November 2020 and would last for a period of six months. The economy needs support to sustain itself as stricter restrictions throughout the nation are expected to slow down business activity.

Some sectors like pubs and bars are being completely closed for operations on a temporary basis to avoid further rise in coronavirus infections in high risk areas. Further, as the economy gets sluggish, self-employed people will also find it hard to get work and might need to be financially supported.

The overall government support including employment grants and support to the hospitality sector are likely to cost the British exchequer an outlay of £13 billion for the six months period beginning November 2020. Around fifty per cent of this will be going in to strengthen the JSS scheme.

At the same time, Sunak has indicated that while it is all right to scale up government aid in an unprecedented crisis like this, however, long-term public finances cannot be ignored for long. Therefore, eventually such spiralling costs would need to be curtailed.

As per official estimates, the UK government has spent close to £200 billion beginning March 2020 to protect employment and help struggling businesses. Such measures have pushed up the total public debt to a record-high value of £2 trillion.

Prime Minister Boris Johnson also said that rolling out extra support was the need of the hour as the British economy had to be kept alive.

However, despite all the help that the treasury could extend, latest unemployment figures revealed that joblessness was on the rise in the UK and more than 1.5 million Britishers were out of a job by the end of August 2020, as per latest government estimates.

UK hospitality

The UK hospitality sector has been one of the worst affected as a result of the pandemic. A recent survey by the Hospitality Asset Managers Association (HAMA) found out that one third of hospitality businesses in the UK are on the verge of a bankruptcy.

Sunak said that for the hospitality companies in areas with high infections rates (under tier-2 Covid restrictions), government aid in the form of a monthly salary support of up to £2100 per month would be provided. The support could be claimed from a backdate of 1 August 2020 if required, added the chancellor.

The sectoral national association UK Hospitality welcomed the move. Kate Nicholls who heads the trade body tweeted that it would save thousands of jobs in the ailing sector.

Jobs support scheme

The earlier announced jobs support scheme had been revised by the treasury to lower the contribution of employers in staff salaries from 33 to 5 per cent.

Further, employees will only need to show up at work once a week, down from one-third of their normal working hours, which was required earlier. This move would also reduce the cost of operations for businesses.

Additionally, the grant for self-employed people has been raised from 20 to 40 per cent of their previous emoluments.

The leading think tank of the nation – Resolution Foundation has said that while the treasury has taken the right steps, but they should have been announced earlier to curtail the ongoing damage to the UK economy and saved more jobs too.

FTSE moved up

The FTSE 100 index inched up from GBX 5776.50 points on 21 October 2020 to GBX 5785.65 on 22 October, gaining more than 9 points, as Rishi Sunak announced further support to the economy.

The momentum seemed to have continued on 23 October with the index inching up further by 1.08 per cent and touching a value of GBX 5848.23. The index’s market capitalisation was recorded to be £1,516.01 billion at that time. The 52-week low/high range of the index was noted to be GBX 4,993.89 and GBX 7,674.56 with a negative one-year return of 24.61 per cent.

The FTSE 250 index also inched up by 106 points to close at a value of GBX 17894 on 22 October 2020, after the coronavirus relief package came in.

IMF forecast

The International Monetary Fund has projected that the British economy could shrink by 9.8 per cent for the year 2020 on account of the coronavirus fallout. Additionally, IMF’s latest predictions put the nation’s growth forecast at 5.9 per cent for the next year 2021.

According to latest estimates from the UK government, the British economy shrank by close to 20 per cent during the second quarter of 2020, which was highest contraction in any European country for the period.

However, any economic forecast is heavily dependant on the nature of Britain’s trading position with the European Union post December 2020, when the Brexit transition period expires. A no-deal scenario would significantly raise the business costs and disrupt cross-border commercial transactions.

The Bank of England, UK’s central bank, was aware of the grave situation and had been contemplating rolling out a fresh round of quantitative easing measures in November 2020 to revive the British economy.

Coronavirus cases

The UK recorded 21,242 new cases of Covid-19 infections on 22 October 2020. These numbers have been rapidly rising since the beginning of September 2020. For an idea, the number of daily corona cases was 1,295 on 1 September.

The total number of deaths due to the coronavirus have crossed 0.81 million by 22 October.

John Edmunds, member, Scientific Advisory Group for Emergencies (SAGE) said that the Covid-19 virus is unlikely to be eradicated, at least in the near future. Nonetheless, a vaccine would help control it and the government should try and lower the incidence as much as it possibly can, he added.

To sum up, businesses are grappling with the second wave of coronavirus pandemic across the nation. This has forced Sunak to increase the government support despite being in a poor financial state with the borrowing figures at an all-time high. While he admitted that the nation is under severe financial stress, but jobs need to be protected as much as they can, hence this added support. Nevertheless, the prospects of a vaccine coming out soon and control in fresh infections with tighter restrictions in place could bring cheer to the investors.